The White House 2014 Budget Energy Proposals: Stuck in A Timewarp

• The President's budget proposal would increase taxes on energy in ways that would harm US competitiveness and consumers.
• Presenting the Energy Security Trust as a zero-sum game undermines its potential effectiveness and bi-partisan appeal.

After spending some time going through the White House's proposed budget for 2014-23, several conclusions were inescapable.  First, this administration still hasn't thought through the implications of the energy revolution that's currently unfolding in the US, as a result of the technology to develop our enormous shale oil and gas resources, which grew even larger this week. Not satisfied to see tax revenues and royalties from oil and gas expand as production grows, they miss no opportunity to seek to slice more from the current pie. This failure of imagination extends to the proposed Energy Security Trust Fund, which sounded intriguing when President Obama mentioned it in this year's State of the Union speech, but now appears to be mainly an accounting gimmick based on a zero-sum mentality.  Meanwhile, the budget's proposals for renewable energy and advanced technology vehicles seem largely divorced from our experience of the last several years.

Let's start with the tax changes and quickly dismiss them, because they're mostly a rehash of provisions in the administration's last four budgets and stand no better chance of Congressional approval this side of comprehensive tax reform.  Once again, we see proposals to eliminate about $4 B per year worth of tax treatment for the oil and gas industry, including provisions like the Section 199 deduction enjoyed by all US manufacturers.  Now add proposed changes in the treatment of foreign taxes, which would subject this highly international industry to double taxation on its activities outside the US, under the misappropriated label of "reform."  (True reform would move toward the territorial system used by most advanced economies.) Finally, the President's budget would eliminate both the widely used last-in, first-out (LIFO) and lower-of-cost-or-market (LCM) methods of cost accounting for inventories.  I don't know how much of the $87 B of higher revenue over ten years ascribed to that shift would come from the oil and gas industry, but it would certainly be in the billions, if this weren't all dead on arrival.

That brings me to the Energy Security Trust Fund, described in the State of the Union as a way to employ revenue from oil and gas development to fund R&D on reducing our dependence on oil.  That looked clever, if applied to incremental resource opportunities.  More production would fund more research, in an almost virtuous cycle.  Yet that's not how the idea would be implemented in this budget.  Instead of opening up new areas for drilling, and earmarking the royalties that would generate, the $2 B for the Trust would come mainly from diverting royalties from leases already in the budget, and from further "reform": higher royalties on US production and higher rentals and shorter lease terms to provide "incentives to diligently develop leases."  The latter echoes the "idle leases" canard we've heard since 2008, reflecting a continued misunderstanding of how the industry actually works, along with the real-world factors that often impede faster lease development, such as permitting delays and lawsuits.

So at least this part of the President's "all of the above" energy agenda is reduced to measures that, rather than "encouraging responsible domestic energy production", would make the US a much less attractive place to invest in developing oil and gas resources, and likely reverse our recent successes.  Yet if the new budget treats conventional energy as a slush fund to be raided, renewables and efficiency are treated to what would amount to a reprise of the 2009 stimulus.  I tallied $39.8 B through 2023 for programs such as alternative fuel vehicles, advanced technology vehicle manufacturing, advanced energy equipment manufacturing, bioenergy crop assistance, home energy efficiency retrofit credits, efficient buildings, and the Energy Security Trust Fund.  44% of the total would go to a single measure: making the production tax credit (PTC) for wind and other renewable energy permanent, instead of phasing it out, as even the American Wind Energy Association has suggested.  That's a bad idea for two reasons. 

First, it ignores a growing body of analysis pointing to the need for significant innovation in wind, solar and other renewable energy technologies, rather than continuing to pay project developers indefinitely to deploy the current technologies.  It also exposes a basic logical flaw in the argument for more subsidies: Renewables cannot simultaneously be approaching the point of becoming competitive with conventional energy, as they must if they are to capture significant shares of the energy market--wind accounted for 3.5% of US net electricity generation last year, and solar just 0.1%--while still needing permanent subsidies at rates orders of magnitude higher, on an energy-equivalent basis, than the tax breaks for oil & gas that the administration seeks to end.

After four years in office, it's reasonable to expect an administration to have learned what works and what doesn't. The President and his officials seldom miss an opportunity to brag about the enviable record of oil and gas production growth that has occurred since 2008, yet continue to propose and enact policies that, had they been in place in the previous decade--when the seeds of this growth were actually planted in an environment of rapidly rising energy prices--might well have nipped that growth in the bud. Nor do they seem to have learned much from the track record of business failures that has dogged their efforts in the renewable energy and advanced vehicles space--a record that extends well beyond the over-used example of Solyndra.  Taxing oil and gas much harder won't lead to more US production, nor will handing investors additional billions in taxpayer funds make renewables and electric vehicles competitive, without significant further improvements in the technologies.